In the second part of this Insurance Asset Risk / Russell Investments roundtable, insurers discuss their views on private equity and infrastructure opportunities, in light of regulatory incentives to making investments.
Adrian Chapman - Group ALM Manager, Legal & General
Ankit Shah - Head of Investments and Treasury, QIC Global
Carolyn Tsalos - Director UK Institutional, Russell Investments
David Walker - senior staff writer and head of projects, Insurance Asset Risk
Jayen Madia - Head of Risk Assets, Axis Capital
Leigh Hazelton - Research Analyst, Private Markets, Russell Investments
Manuel Dusina - Director, Infrastructure & Energy, Scottish Widows
Prasun Mathur - Private Assets Lead, Aviva UK
Simon Blowes - Investment Manager, ReAssure
Chaired by Vincent Huck - Editor, Insurance Asset Risk
Vincent Huck: Last year, the European Commission made amendments to the equity capital charges under Solvency II, with the introduction of a long-term equity asset class. At the time, it was hailed by some as an El Dorado for insurers investing in private equity. Have you looked at the changes, and did you find opportunities?
Adrian Chapman: Within the Solvency II regime, Legal & General has an internal model, where we provide our own assessment of those risks. So, such changes to the standard formula approach do not really tend to affect us. We have an allocation to private equity in our capital business but that follows the internal model assessment.
Vincent Huck: Does private equity have a smaller allocation than private credit? And if so, what are the stumbling blocks to increasing the allocation to private equity?
Adrian Chapman: For us the majority of assets are supporting our annuity businesses, for both bulk purchase and individual annuities. Private equity does not provide the required matching characteristics. Particularly, within the Solvency II regime, we operate with the matching adjustment, and these eligibility rules [for MA inclusion of investments] oversee our allocation. That is by far our biggest investment allocation. We do have a capital business, which sources and has appetite for the right PE opportunities, but that is smaller comparative to the private debt interest we have in our annuity book. Some of our more recent private equity deals have related to renewable energy sources.
Vincent Huck: Manuel, you do not invest at all in private equity, why?
Manuel Dusina: We mainly invest for our annuity book and PE is not MA-compliant, because it does not provide certain and fixed cashflow, private equity is out of the picture. And because we invest as principal only (our own money), we are not like a fund manager - we do not really go out and look for clients we can invest on the behalf of. So, PE is an area that we do not look at.
Vincent Huck: Simon, you have said you looked at the transition from core fixed income to private markets. Have you looked at private equity and those changes in the standard formula under Solvency II that I mentioned?
Simon Blowes: For us it is exactly the same answer as has just been given. I think 90-95% of our shareholder portfolio is in the MA book. Equity does not meet specific criteria for it to be MA-eligible, and for that reason it is not an asset class that we currently look at. We do have some PE in our policyholder funds, but...in the shareholder book we are purely fixed-income investors.
Vincent Huck: Carolyn, as an asset manager, have you seen any insurance clients making the most of that change to risk charges within the regulation?
Carolyn Tsalos: We are aware of a number of insurers who have small allocations to private equity. However, we have not yet heard of people adjusting their allocation much since the reduced capital incentives commenced. We have heard a number of insurers saying that they are 'earlier in their thought process' around this, or continuing to look at it. We have heard some insurers say that whilst it may not be applicable for their main balance sheet assets, they acknowledge the stronger level of intentionality which is possible within equity based private assets from an ESG/ impact standpoint. As such, we're aware of a couple of insurers considering ways they could make investments outside of their main portfolio.
From our perspective, Leigh and the team look across the whole private markets universe, including debt and equity, and we are obviously very mindful of the attractive risk-return profiles that can be available in private equity/infrastructure equity relative to the private credit/ infrastructure debt.
It is an area of interest for us to understand how this will develop in the industry. Could further blue-sky thinking unlock access to other attractive equity based assets, following the reduced capital obligations.
Prasun Mathur: Within private equity, we have made some strategic investments in PE in the past, but it is certainly not a core asset class that we focus on. I have seen opportunities and propositions in PE that can be interesting, but only after structuring. Where PE can actually offer a good proposition [is] if you are considering unlevered real-asset private equity. If it offers long-term sustainable cash flows, then financing an unlevered transaction can lend itself, post-structuring, to a very efficient outcome on our balance sheets. Not a lot of innovation has happened in this front, noting the regulatory challenges that it needs to address. It is one area that I would be keen to explore further. And to some extent, we are trying to do so already, in certain asset classes.
David: Are any of you expecting large-scale infrastructure spending to get economies going after COVID-19 and might public infrastructure provide opportunities, or you are more pessimistic on that?
Manuel Dusina: It depends on the way [governments] will procure infrastructure. If they procure it in private-public ties, ultimately that puts more burden on the governments' balance sheets.
I understand a lot of European countries are setting up agencies or governmental bodies to act as granting authorities, and there is some sort of 'remoteness' there, which potentially could be the way forward.
The question is about creditworthiness - is the government really behind [a project], or if something goes belly-up, will the government just let it go?
On the other hand, if they are procuring more private infrastructure, like renewables for instance, there are countries where the subsidies are capped, or they are now promoting subsidy-free transactions. That is attracting private capital and limiting governments 'liabilities', maybe [governments] need to incentivise that.
Adrian Chapman: Our capital division does have appetite for the right PE opportunities. A lot is sourced in-house. Some of our more recent deals have related to renewable energy sources.
Part I of this roundtable, looking at COVID-19 related impacts on private market investments, is available here.
Part III will be published next week and will cover environmental, social and governance considerations when investing in private markets.